GBP/USD corrects from one-year peak amid modest USD strength, downside seems cushioned

GBP/USD kicks off the new week on a weaker note amid the emergence of some USD buying.
September Fed rate cut bets should cap gains for the USD and lend some support to the pair.
Diminishing odds for an August BoE rate cut also warrant caution before placing bearish bets.

Haresh Menghani FXStreet

The GBP/USD pair attracts some selling during the Asian session on Monday and for now, seems to have snapped a three-day winning streak to the 1.3000 neighborhood, or its highest level since July 2023. Spot prices currently trade around the 1.2965 area, down just over 0.15% for the day amid a modest US Dollar (USD) strength, though any meaningful depreciating move seems elusive.

The attack on US Presidential candidate Donald Trump on Sunday raises the level of political uncertainty and drives some haven flows, allowing the USD to recover a part of Friday's slump to over a three-month low. That said, growing acceptance that the Federal Reserve (Fed) will soon begin its rate-cutting cycle should continue to act as a headwind for the Greenback and lend some support to the GBP/USD pair.

In fact, the CME Group's FedWatch tool points to over a 90% chance that the Fed will lower borrowing costs by 25 basis points (bps) in September. Moreover, the markets are pricing in the possibility of another interest rate cut in December and the bets were lifted by the softer-than-expected US consumer inflation figures released last week. This might hold back traders from placing fresh bullish bets around the USD.

The British Pound (GBP), on the other hand, draws support from diminishing odds of a rate cut by the Bank of England (BoE) in August, especially after data released last week showed that Britain's economy grew more quickly than expected, by 0.4% in May. This, in turn, warrants some caution before confirming that the GBP/USD pair might have formed a near-term top and positioning for any meaningful downfall.

Market participants now look to the release of the Empire State Manufacturing Index from the US. The focus, however, will remain on Fed Chair Jerome Powell's speech, which, along with the US Treasury bond yields and the broader risk sentiment, will influence the USD. Nevertheless, the aforementioned fundamental backdrop supports prospects for the emergence of some dip-buying around the GBP/USD pair.

Pound Sterling FAQs

What is the Pound Sterling?

The Pound Sterling (GBP) is the oldest currency in the world (886 AD) and the official currency of the United Kingdom. It is the fourth most traded unit for foreign exchange (FX) in the world, accounting for 12% of all transactions, averaging $630 billion a day, according to 2022 data. Its key trading pairs are GBP/USD, aka ‘Cable’, which accounts for 11% of FX, GBP/JPY, or the ‘Dragon’ as it is known by traders (3%), and EUR/GBP (2%). The Pound Sterling is issued by the Bank of England (BoE).

How do the decisions of the Bank of England impact on the Pound Sterling?

The single most important factor influencing the value of the Pound Sterling is monetary policy decided by the Bank of England. The BoE bases its decisions on whether it has achieved its primary goal of “price stability” – a steady inflation rate of around 2%. Its primary tool for achieving this is the adjustment of interest rates. When inflation is too high, the BoE will try to rein it in by raising interest rates, making it more expensive for people and businesses to access credit. This is generally positive for GBP, as higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls too low it is a sign economic growth is slowing. In this scenario, the BoE will consider lowering interest rates to cheapen credit so businesses will borrow more to invest in growth-generating projects.

How does economic data influence the value of the Pound?

Data releases gauge the health of the economy and can impact the value of the Pound Sterling. Indicators such as GDP, Manufacturing and Services PMIs, and employment can all influence the direction of the GBP. A strong economy is good for Sterling. Not only does it attract more foreign investment but it may encourage the BoE to put up interest rates, which will directly strengthen GBP. Otherwise, if economic data is weak, the Pound Sterling is likely to fall.

How does the Trade Balance impact the Pound?

Another significant data release for the Pound Sterling is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought-after exports, its currency will benefit purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.

Author

Haresh Menghani

FXStreet

Haresh Menghani is a detail-oriented professional with 10+ years of extensive experience in analysing the global financial markets.

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